The New Auditor’s Report

Remember that feeling of satisfaction when your auditor questioned your accounting for a large transaction and, after lots of discussion, fact finding and research, the auditor finally agreed you were presenting it correctly resulting in a pretty, clean audit opinion. Well, those days are over if the PCAOB gets it way. Even if you were right, the PCAOB proposal on revisions to the audit report will require the auditor to identify the “critical audit matter,” describe why it was critical and refer to the appropriate disclosures in the financial statements. This is beyond the old emphasis of matter paragraphs and is only one of several new requirements proposed by the PCAOB.

Normally, preparers don’t care much about PCAOB rule changes impacting the auditors, but this time they should take notice because it is going to significantly change that audit report attached to your financial statements. In fact, you might also need to plan on additional page(s) for your report because the audit report is likely to be much longer in the future.

In addition to a new statement on auditor independence and a required disclosure on when the auditor began serving as the company auditor, the new report will also require the auditor to “evaluate” “other information” previously not subject to the audit. “Other information” includes selected financial data and Management’s Discussion and Analysis (MD&A). While “evaluate” is something less than “audit,” it is also clearly more than the current requirement to review such information for inconsistencies with the audited financial statements.

In addition, this “evaluation” will be included in the auditor’s report. That would seem to open up the auditor to potential liability if there was something “wrong” in the MD&A so I think we will see significantly more work in that area, if only as a purely defensive measure, if the PCAOB proposal becomes a final rule. You can also bet that the auditors will ask for higher fees as a result of the additional work. We all remember how much the fees went up with the adoption of Sox 404 reporting. While this should not be on that scale, I think it will be more than insignificant (to borrow from our standard setter’s terminology in the leasing standard).

There of many out there that believe it’s about time the MD&A is subject to some audit procedures given its importance to investors, and there are others that feel just as strongly that the MD&A needs to stay out of the audit so it can be truly focused on forward looking information which is notoriously difficult to audit. Whatever your feelings, now is the time to let them be known by the PCAOB. The comment deadline in December 11 which will be here before you know it, so check out the most sweeping revision to the auditor’s report in years and let your voice be heard.